There are massive short gamma positions (by dealer desks) as the SPX approaches the 200 day MA level of around 2800. The negative gamma hedging is going to accelerate as we approach this level. If this level (200 day MA) doesn't hold, it's lights out for the stock market. We could see a >5% gap lower and the VIX cash explode to 30%, if the market gaps down to 2600. Get ready to buy any resting puts in the book on this market melt-down...guaranteed big winner and a trip to the Porsche dealership.
Curious, as no option can create a 'net' positive or negative gamma position, why do you assume the positive gamma side will be doing nothing?
"Curious, as no option can create a 'net' positive or negative gamma position, why do you assume the positive gamma side will be doing nothing?" Good point. But I think the assumption of this chart, which I extracted from a reputable Seeking Alpha contributor, is that a majority of the positive gamma positions are long equity portfolio managers who are big buyers of downside protection, along with speculators (directional players) looking for a market crash. Unlike the derivatives desks (short gamma position holders), the positive gamma holders are not vol or delta neutral players looking to scalp futures or stock, or profit from a spike in vol. They have simply loaded up on OTM puts to protect their equity longs, or to speculate on direction. The expensive gamma they paid for is just gravy on top if the market blows through their long strikes. So when the market starts gapping lower, the negative gamma players are frantically selling futures or stock to stay flat deltas, while the positive gamma holders are letting their put deltas ride to offset their long equity losses, or are looking to cash out buy selling out their naked long puts. Very few positive gamma holders (unless you are one of the few vol players/delta neutral traders long downside) are buying futures or stock on a market melt-down, while there are plenty of negative gamma futures/stock sellers as the market starts to decline. Helps explain much of the underlying behavior. I also think the chart shows a very common position for S&P 500 groups: long OTM calls and short OTM puts. I know a bunch of groups that always have this position. In addition, they are usually net short option premium, always under-hedge the calls and/or over-hedge the puts, and are long lots of "teenie" puts in case something really bad happens.
What about position players, perhaps not so wise, who would buy their puts "late" -- if mkt gets to 200SMA, might one expect a frenzy of put buying, strikes @200SMA and lower, to buoy the mkt, so that even if it goes lower, it will halt not too far away (20 MONTH SMA ?) Also, it's supposedly common for price to bounce off the 200SMA. Is it possible that nevertheless, there's also usually a lot of short gamma at the 200SMA ? I realize you said "if" mkt gets below 200SMA, you weren't predicting it would. Perhaps it's typical for such a dip not to happen ?
The market has been bouncing off the 2820 level, with vol imploding rallies...so this scenario has been avoided. If paper were to come in and aggressively sell puts to the short gamma positioned trading desks on the way down, then this would alleviate their problem and as you said will "buoy the market" and help prevent it from dropping too far. IF they are unable to cover their short gamma positions on a market decline, this will only exacerbate the selloff, especially if they are forced to sell more OTM puts. This will be also accompanied by all the selling from short-term long equity holders who likely have sell stops just below the 200 SMA. My point was to show the unusually extreme asymmetric risk to the downside in this current environment. When the market starts declining the short gamma hedgers will intensify the selling...and according to the chart, the selling will accelerate the further we go lower, especially if the trading desks are unable to cover their shorts. Obviously vol will explode if this level is breached. We could see it as early as tonight (Sunday evening).
I never will understand that. To trade a market day in and day out waiting for an event, possibly for years, then when that event occurs you are not set up to rip the cover off the f'n ball, and instead spend that day trying to bail your ass out of trouble, when you should be moving into your longs and jizzing all over yourself watching vol pop and your delta (that you've already 'partially' hedged twice) again reaching embarrassing proportions.
"I never will understand that. To trade a market day in and day out waiting for an event, possibly for years, then when that event occurs you are not set up to rip the cover off the f'n ball, and instead spend that day trying to bail your ass out of trouble, when you should be moving into your longs and jizzing all over yourself watching vol pop and your delta (that you've already 'partially' hedged twice) again reaching embarrassing proportions." - Wheezooo I couldn't agree with you more. But I think most trading groups like having a position that shows them flat to long gamma and collecting theta premium at the same time. If the skew is steep enough this is a very easy greek risk profile to put on by being long "cheap" calls and short "high skewed" puts DN. And then they just assume if the market starts to break they'll have ample amount of time and opportunity to buy back their shorts...or the trading will be good enough to make up for the position losses. What usually happens in a super risky market like this where one crazy Trump tweet can send the market crashing, is that when the market gaps lower those short puts have already exploded much higher than you thought they ever could...and any short covering of option premium is locking in a huge loser. So all those great day trading profits are a complete waste because your position was set up to lose big on a massive market correction. Becoming enamored with a short skew position that although works most of the time, will be your undoing when there is a colossal market meltdown.
No better feeling in the world than when after you "jack" your vols up, you realize you have a boatload of futures/stock to buy while the market is crashing.
Wheezooo was what we originally named change in delta for change in vol. Someone said it was the sound they heard every time it happened. The sound of blowing through a kazoo. It stuck for a while, then became DdelV, which is a bit more appropriate. I forever called it wheezooo and later added in balloons, clowns, Carl Weathers playing the piano, and a midget dressed like a cowboy riding around on a broom handle.